I understand CA doesn't offer a 529 tax deduction, so you're right that one of the primary benefits doesn't exist. Me, I view all tax shelters as useful; I currently do not have enough of them to save everything I want to save for retirement, so I would rather not divert some of that retirement savings to some other use.
A Roth and a 529 have pretty much the same tax consequences: no deduction (in your state) for the contributions; both grow tax-free; and then you can use the money (within the rules) without tax. So from the financial contribution-and-growth perspective, they operate similarly. A couple of distinctions to consider:
1. Obviously, 529s are limited to eduational expenses, but if you're looking to save for college, that's not an issue.
2. For a Roth, you can withdraw your contributions, and if you are withdrawing before 59.5 for educational expenses, you can withdraw the growth without paying the 10% penalty. However, you will still pay taxes on the growth if you take the money out before 59.5. Also keep in mind that if you're looking to save for 15 years or so, most of what you're counting on to pay for college is the growth on that original investment. So you lose the tax-free growth unless you will be above that 59.5 age threshold by the time you need to draw on the growth.
3. Roths are limited to IIRC $6500/yr. 529s are not -- they often have limits, but it's on the order of six-figure account values.
4. I am not an expert in this, so I may stand corrected by someone who is, but this is how I understand it: most colleges do not consider amounts in retirement accounts in determining financial aid, but they would consider withdrawals as income in the year it's withdrawn (check me on that). 529 plans, OTOH, are generally counted as parental assets and so assessed at a little over 5% (i.e., the college will assume you can pay 5-6% from the account every year as part of your share), and withdrawals are also counted as income in the year it's withdrawn (the common advice I've heard is to wait until junior year to make withdrawals if you can to avoid hurting financial aid). However, some private colleges do consider retirement plans, home value, and other sorts of things in assessing financial need.
It seems to me that if you have the ability to save both for college and for retirement (i.e., maxing out the Roth and saving for college), then you should do the math on both options. Two options below; both assume you are maxing your 401(k) and have another $10K to save for college and/or retirement.
Option 1: Put $6500 in your Roth and $3500/yr in a standard brokerage account. Result: your Roth will not be considered in financial aid equations, but the $3500 you put in the standard brokerage account will be assessed at that 5-6% rate. Start by cashing in your Roth to pay for college. Your contributions are free, but the share that represents your gains is taxed as income that year, and then counted as income the following year in your financial aid calculations. The $3500/yr in the brokerage account, meanwhile, grows more slowly, because you are paying capital gains every year, and you then pay capital gains whenever you sell (whether for college or retirement). If you use some of this money for college, I assume the growth would count as income, but because you've already paid capital gains on your basis, that part of the withdrawal shouldn't affect aid calculations.
Option 2: Put $6500 in your Roth and $3500/yr in 529 (or the other way around, depending on whether you need more for retirement or college). The amount in the Roth is not considered in financial aid equations, but the $3500 in the 529 is counted at that 5-6% rate -- (so the result is the same as above if you are putting the same amount in the 529 vs. the individual brokerage account; if you put $6500 or all $10K in the 529, then that provides more to be assessed at that 5-6% rate). You then cash out the 529 to use for college. There is no tax on these withdrawals, and if you can wait until Junior year, there is also no impact on financial aid; however, if you need to withdraw for freshman/sophomore year, that withdrawal is counted as income (so, again, same result as taking it from the Roth). If you can maintain the Roth until 59.5, when you need to take those withdrawals, the whole thing is tax-free.
I suspect if you put everything in a spreadsheet and made some assumptions about tax rates, you'd probably find you're better off using the 529, because in either case you're maxing the Roth, so it's just a question of whether the rest of the money goes to a taxable account or gets some tax protection in the 529. But run the numbers yourself for your own situation.
